Monetary Impacts Of Climate Change

While it is very difficult to reliably estimate the monetary impacts of climate change, one study estimates that climate change may lower India and Southeast Asia's gross domestic product by 9-13 percent by the end of the century, compared to what it would be in the absence of climate change. An estimated 145-220 million more people may have to subsist on less than $2 a day, resulting in 165,000-250,000 additional annual child deaths in south Asia and sub-Saharan Africa attributable just to lower income. Lower farm profits will increase rural poverty rates, preventing farmers from investing in the necessary capital to expand and secure future production.

A few developed economies will benefit from moderate global warming in the short term, yet are at risk under scenarios predicting greater warming toward the end of the century. Canada, Russia, and Scandinavia may see higher crop yields, fewer cold-related deaths, lower heating fuel needs, and an influx of winter tourists, initially. However, warming in these countries is predicted to progress faster, requiring ecosystems to adapt more quickly. Lower latitude high-income countries are more vulnerable to consequences from climate change. Even a 2-3 degree increase in temperatures may lead to significant decreases in water availability in southern Europe and California. Regions relying on snow packs for agricultural water storage are predicted to experience a more volatile water supply throughout the century. Predictions for the world's largest economy, the United States, are a gain or loss in GDP of one percent at moderate increases in global temperatures, with potentially negative consequences at higher temperature increases.

A major concern are the economic impacts of extreme events, such as the shutdown of the thermohaline circulation, extreme shifts in regional weather patterns, shifts in El Niño-Southern Oscillation (ENSO), changes to the monsoon, as well as the potential melting or collapse of major ice sheets. It is estimated that costs of extreme weather events could be on the order of 0.5-1 percent of global GDP by 2050, and higher as the globe gets warmer. Even moderate increases in hurricane wind speed of 5-10 percent could double annual economic damages from hurricanes. In addition, costs of flooding in Europe could triple or quadruple, unless flood management actions are taken. Extreme heat events, such as summer 2003, which killed 35,000 people and caused $15 billion in agricultural damages, could be quite common by mid-century. More large-scale shocks could potentially disrupt global financial markets and trading patterns, if they interfered with transport and communications infrastructure.

mitigation policies

One unknown that will greatly affect the impacts of climate change on the economy is the degree and type of mitigation policy chosen by the international community. Global government action on climate change began with the Rio Earth Summit in 1992, which resulted in the Kyoto protocol of 1997. Ratifying industrialized countries agreed to cut back their emissions by a collective average of 5 percent of 1990 level emissions. Successor agreements require even more stringent cutbacks to achieve stabilization at roughly double pre-industrial concentrations of CO2 in the atmosphere. Even though carbon-containing fuels have served as one of the main inputs to the production of goods and services since the Industrial Revolution, decreasing their use does not necessarily imply decreasing the amount of goods and services produced.

The use of substitute fuels with lower life-cycle carbon content, or the more efficient use of existing fuels by improving combustion technology, or switching to hybrid technologies can be encouraged. In order to decrease the amount of carbon emitted into the atmosphere, governments can use command and control regulations, which prescribe the technology used or the total amount of carbon emitted by each source. An alternative would be to employ flexible instruments, which may reach the same emissions reductions, but at a lower cost. Two examples of such flexible instruments are carbon taxes and cap-and-trade systems. Cap-and-trade systems rely on the trading of so-called carbon permits, where the regulator determines the total emissions of carbon by all sources through the number of permits issued. A carbon tax essentially imposes a per unit fee on each ton of carbon emitted. Under certain assumptions, these methods provide reductions at least cost. The choice of policy instruments also has implications for technological innovation. It has been shown that taxes and cap-and-trade programs provide much stronger incentives for technological innovation than command and control strategies such as emissions or technological standards.

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